Industrial Production Tumbles In August - September 14, 2012

The Commerce Department reported a disquieting metric this morning, as that government agency affirmed that U.S. industrial production had fallen sharply in August, skidding by an outsized 1.2% during the month. Expectations had been for a decline of just 0.3%. That followed an increase of 0.5% in July. The July increase, meanwhile, represented a slight downward adjustment from the initially estimated rise of 0.6%.

However, the August decline, while serious, was not quite as dour as the headline number would suggest given that a portion of the setback was attributable to the ravages of Hurricane Isaac, which struck the Gulf Coast region in late August. Thus far this year, the respective monthly changes in industrial output have been increases of 0.6% and 0.5% in January and February, a decline of 0.6% in March, a gain of 0.8% in April, a flat reading in May, and rises of 0.1% and 0.5%, respectively, in June and July.

This up-and-down pattern closely parallels the uneven track being run by the economy at large so far in 2012. The August setback, meantime, was the steepest monthly drop since March of 2009, when the nation was in the depths of the most serious economic calamity since the Great Depression of the 1930s.

As to the aforementioned hurricane, Isaac is estimated to have clipped 0.3% from the output figure, which consensus had estimated would decline by a nominal 0.3% in August. ``Precautionary shutdowns of oil and gas rigs in the Gulf of Mexico in advance of the hurricane contributed to a drop of 1.8% in the output of mines for August,'' according to the Federal Reserve.

All told, manufacturing had been a major strength in the formative stages of the business recovery, but such activity has weakened somewhat in recent months, even as housing has perked up and the retail sector has generally shown improvement. This latest data series suggests that our expectation for GDP growth in the current period of close to 2% is probably not going to be exceeded.

In addition to the overall pullback in industrial production last month, we also saw manufacturing activity slump by 0.7%, while output at the nation's mines and utilities plunged by 1.8% and 3.6%, respectively. Manufacturing accounts for the lion's share of the aggregate industrial output.

At the same time, U.S. factories were notably less busy last month, with utilization slumping from July's 79.2% level to 78.2%. At the manufacturing level, factory use fell from 77.7% in July to 77.0% last month. The nation's mines, meanwhile, operated at 88.6% in August down from 90.4% in July, while utilities in this country saw activity lessen from 76.2% in July to 73.3% in August.

Taken as a whole, these two reports were disappointing, although probably not game changers due in part to the effects of the Gulf Coast storm at the end of August. With weather patterns now back to normal, it will be interesting to see where we are as far as September industrial production and factory utilization are concerned. That combined report will be released at the middle of next month.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.